In a decision rejecting a nine-prong “qualified privilege” analysis as lacking predictability and as “inconsistent” with Pennsylvania privilege law, the Pennsylvania Supreme Court recently held that courts should look to the American Law Institute’s Principles of Corporate Governance (the “ALI Principles”) when analyzing attorney-client privilege issues in corporate derivative suits. Pointing to its adoption of certain ALI Principles in the seminal 1997 Cuker decision, the court directed that those principles should guide the analysis of who holds the privilege and how far the privilege extends when “arguably both the derivative plaintiffs and the current management claim to be acting on behalf of the corporation.” The decision in Pittsburgh History & Landmarks Foundation, et al. v. Arthur Ziegler Jr. et al., Nos. 53 WAP 2017, 54 WAP 2017 (Pa. Jan. 23, 2019) provides clarity and should lead to more consistency in disputes involving attorney-client privileged discovery in shareholder derivative suits. If lower courts apply the ALI Principles consistent with the Landmarks Foundation ruling, corporate management should be able to assert attorney-client privilege over a fairly broad category of communications where the corporation has elected to dismiss a pending derivative suit in accordance with the business judgment rule.
The dispute in Landmarks Foundation arose out of the reorganization of the boards of trustees of the Pittsburgh History & Landmarks Foundation (the “Foundation”) and its subsidiary corporation, Landmarks Financial Corp. (the “Corporation”). In June 2012, the Foundation’s board created a Governance Task Force to review various Foundation practices. Among the Governance Task Force’s eventual recommendations was to substantially reduce the number of seats on the boards of the Foundation and Corporation. As a result, five then-board members (“Plaintiffs”) lost their seats. Plaintiffs allege that, rather than being a legitimate business strategy, the removal was improper, ineffective, and an attempt to prevent their oversight of the Foundation’s president, whom they believed was engaging in actions that were inconsistent with the Foundation’s mission. After serving a demand on the Foundation and Corporation in accordance with standard procedures for bringing a derivative action under Pennsylvania law, Plaintiffs brought suit against the current management of the Corporation and Foundation (“Defendants”), contending that the board reduction was a scheme to eliminate supervision over the Foundation’s president, and that the resulting lack of supervision would be harmful to the Foundation and the Corporation.